HMRC VAT crackdown spreads to subcontracting

HMRC has launched a major investigation into subcontracting that could result in tens of millions in fees and fines after it discovered many colleges and training providers are ignoring VAT rules on management fees.

FE Week understands that the tax office has put together a team of around 20 special investigators, who will find out why primes have not been applying the 20-per-cent charge to their top-slices, per the rules.

HMRC plans to investigate up to six years of unpaid VAT and will attempt to claim it back.

This could rise to 12 years if evidence is found that prime providers knew about the charge and failed to apply it anyway.

Substantial fines are also likely, according to one VAT expert who spoke to FE Week.

The news will send shockwaves through the sector, and providers fear the business and ramifications of any fresh charges.

Government rules – VAT Notice 701/30 (pictured) – state that while vocational training is exempt from the tax, management services in subcontracting relationships are not. This comes alongside the top-slice primes generally charge subcontractors, which is usually around 20 per cent of the government’s funding.

However, evidence seen by FE Week suggests the VAT rule is unknown to most providers, and has not been applied for years, meaning that hardly any has been claimed.

Around a £1 billion of funding per year is subcontracted across the ESFA post-16 funding streams, which FE Week estimates would generate around £40 million per year in VAT for HMRC.

For its own part, HMRC claimed the guidance has always been in place and in force.

“Vocational training management fees charged by a prime provider to a subcontractor are chargeable with VAT at the standard rate of 20 per cent,” said a representative.

“This applies regardless of whether the charge is netted off against government funding or whether the prime provider is a college of further education or a private provider.”

The spokesperson added that any under-declarations of VAT will be dealt with under the tax office’s usual compliance procedures.

Management fees charged by a prime provider to a subcontractor are chargeable with VAT

The sector will be worried that any fines or attempts to retrieve years of unpaid tax would plunge many small training providers into financial trouble.

Shane Mosley, a partner at accountancy specialist Malcolm H Preece, has offered advice to providers who have not complied with the rule and what the next steps are to take (see below).

“Prime providers should look back over their records and ascertain both how much VAT is involved and crucially who this VAT should have been charged to,” he told FE Week.

“They should also consider making initial contact with HMRC to put on record that they are aware of the potential problem and are currently looking into their own compliance – this will potentially mitigate penalties due to the cooperation of the taxpayer.”

If HMRC does come knocking, as well as any VAT that should have been charged, inspectors may be looking for penalties and interest.

“For a situation like this which appears to be an industry-wide error, rather than any individual concealment, I would envisage the initial fine to be at the lower end, perhaps 10 to 15 per cent.”

This is the second VAT crackdown HMRC has made against FE providers in the past two weeks.

On February 13, FE Week revealed that private providers were being let off millions of pounds in unpaid tax because HMRC had given them incorrect advice.

Advice from a VAT expert: Expect 10- to 15-per-cent fines

Shane Mosley, a partner at accountancy specialist Malcolm H Preece, spoke to FE Week about what actions HMRC is now likely to take, and offered advice for affected providers.

“Prime providers should look back over their records and ascertain both how much VAT is involved and crucially who this should have been charged to,” he said.

“Are these subcontractors VAT registered themselves enabling to (potentially) claim back some or all the VAT from HMRC? Do they still exist?

“They should also consider making initial contact with HMRC to put on record that they are aware of the potential problem and are currently looking into their own compliance – this will potentially mitigate penalties due to the cooperation of the taxpayer.

If HMRC comes knocking it will be looking for penalties and interest

“If HMRC comes knocking, as well as any VAT that should have been charged, it will be looking for penalties and interest.

“Penalties are anything from zero per cent to 100 per cent, on the following bands: zero to 30 for a lack of reasonable care; 20 to 70 for a deliberate mistake; or 30 to 100 for something deliberate and concealed.

“For something like this which appears to be an industry-wide error, rather than any individual concealment, I would envisage the initial fine to be at the lower end, perhaps 10 to 15 per cent.

“It would then be down to the individual provider to prevent this going any further by conversing with HMRC in a timely and honest manner.

“In some cases, where an industry-wide problem has been identified, HMRC has levied at zero per cent as long as the other party acts in a transparent way, but management charges will be looked at by HMRC as an ‘error’ as opposed to a ‘lack of understanding’, and therefore it is my belief that at least 10 to 15 per cent will be levied as mentioned above, should HMRC pursue this.

“Finally in terms of time, HMRC actually has the power to go back 20 years in some cases. Standard procedure, which I believe will prevail here, is the normal four-year window open to HMRC without opening a specific enquiry.”

Feedback

Phil Hatton

I know that this was not a cost factor known by the SFA when I conducted the Ofsted survey on apprenticeships and subcontracting (well, according to the SFA anyway). As colleges and training providers all undertake audits every year by ‘reliable’ companies who have tax experts with up-to-date knowledge, just where has this one suddenly come from? We have a further education system that is running on exhaust fumes because of inadequate funding and this could be the final nail in the coffin for many good colleges and providers, let alone those who are in imminent danger. AoC and AELP will no doubt be making urgent representations to government but this, if seen through, will only impact on one group – LEARNERS.

Anne

This will be interesting in how HMRC unpick this one as the term “management fee” and what that fee includes differs across providers. For example, if the fee is inclusive of charges relating to registration/certification, provision of learner resources (i.e. eportfolio), IQA, delivery of learning etc. then these are direct costs associated with the learning not the management of that learning.

John Fields

Ludicrous! Frankly, the sub contractor should under no circumstances be fined or penalised if a college has failed in their role of applying the 20% VAT. It is not down to the provider to inform the Prime that hey should be charging VAT and neither should the sub contractor be fined as a result. If there is addiotnal VAT to be paid one of the following should apply:
– The college stumps up the money and takes the 20% off of their bottom line
– HMRC should swallow the loss as it has been shown time after time that they have in fact been negligent themselves. I certainly don’t see hMRC stumping up fines when they are found to be in the wrong!!! This will most likely cripple most small operators and as a result will see many going to the wall. Additionally, the funded sector os already in a mess and this is just going top make things worse and will result on a reduction of tax revenue in the long run and a further reduction in good quality companies that runa tight ship being penalised while the likes of Quals Direct continue to be propped up by the likes of the tax payer. It really is high time that the iundustry said enough is enough!!!

David

I have spoken to our accountant and he was unaware of this, delivering government contracts is now becoming a joke, there are going to be many more now going to the wall and going into voluntary liquidation, which will the put pressure on the governments redundancy scheme as the employers will not be able to pay this, then there is the claims for Universal Credit etc, other creditors not getting paid, the snowball effect will be ongoing. Its a good way to kick an industry and ending the industry, this could end up putting the country back into a recession. If you look at the whole of these VAT rules, it still states New Deal is non VATable – this stopped in 2010/11, 7 years out of date. I also wonder if Learn Direct and any of the the big College Groups charged VAT on their subcontracting Fees, that will be a big amount, will the government let them off with that one as well and then punish the smaller genuine providers because they cannot afford to fight it?

Christine Tilley

I totally agree and feel this is extremely unfair. I am both a primary contract holder and have subcontractors and I am also a subcontractor to the FE sector. I have never been invoiced VAT on management fees and I have never invoiced my subcontractors VAT on the management fees we charge.
We had a VAT inspection in 2014 and we showed all of our VAT calculations both at standard rate and at zero rate and were not told we were doing anything wrong. Our accountants also carried out compliance reports on two occasions and did not pick up this error. HMRC should be made accountable for their lack Of information and for the incompetence of their inspectors who did not pick this up when they did their vat inspection
I think what boils my blood the most is that I have to find out about this through the FE week not from HMRC directly or even from my accountants… Surely this lacks transparency on their part. They should treat the situation the same as the student loans by applying VAT from now moving forward. As a company we are being hit twice as we did pay VAT on student loans unlike some providers who have been let off And we are now having to rectify the VAT situation/saga on management fees. Unlike Bradford College I cannot go and ask for a financial bailout of £3 million as I am a small independent training provider of 35 years who continually delivers training to a high standard fat higher than the national average